Decisions — Earning the credit

In T.C. Memo. 2016-200 (Tsehay), the taxpayer was employed as a custodian at a community college during 2013. During that year, he was married and living with his wife and five children in a public housing apartment. He and his wife had separated by the time the taxpayer was ready to file his 2013 tax return.

Though the taxpayer said he had asked his preparer to file for him as “married filing separately,” the preparer filed the taxpayer’s return as “head of household.” Among other credits, the tax return claimed the earned income tax credit for three children.

In 2015, the IRS disallowed the earned income tax credit, and changed the taxpayer’s filing status from head of household to single.

The court said the taxpayer had “three or more” qualifying children for 2013, and was entitled to the earned income credit.

The court agreed the taxpayer did not qualify for head of household status because he was married at the end of 2013. However, the court said that since the taxpayer was married, he also did not qualify for single status as determined by the IRS. Instead, the court determined the taxpayer’s correct filing status was married filing separately.

In a formal memorandum prepared by the IRS Office of Chief Counsel known as an “Action on Decision (AOD 2017-05),” the IRS stated it would not follow the court’s decision in future litigation.

Here are the relevant code sections.

From internal revenue code section 2. Defines a head of household as an individual taxpayer who, among other things, is “not married at the close of the taxable year and is not a surviving spouse.” Also defines certain married individuals living apart–For purposes of this part, an individual shall be treated as not married at the close of the taxable year if such individual is so treated under the provisions of section 7703(b).

From internal revenue code section 7703. Says if an individual who is married and who files a separate return maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a child with respect to whom such individual is entitled to a deduction for the taxable year, such individual furnishes over one-half of the cost of maintaining such household during the taxable year, and during the last six months of the taxable year, such individual’s spouse is not a member of such household, such individual shall not be considered as married.

From internal revenue code section 32: Provides an eligible individual with an earned income credit against the individual’s income tax liability, subject to a phaseout explained in section 32(a)(2). The amount of the credit to which an eligible individual is entitled increases if the individual has a qualifying child. Defines an “eligible individual” as any individual who has a qualifying child for the taxable year, or any other individual who does not have a qualifying child for the taxable year (with qualifications related to living in the U.S., being between age 25 and 65, and not being a dependent.) States that section 32 applies in the case of married individuals only if a joint return is filed for the taxable year.

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Subject: Yosef A. Tsehay v. Commissioner, T.C. Memo. 2016-200

Issue: Whether a taxpayer whose filing status is married filing separately is entitled to an earned income tax credit.

Discussion: The tax court held that the taxpayer’s filing status was married filing separately, rather than head of household as claimed by the taxpayer, or single as determined by the IRS.

The tax court also held that the taxpayer had qualifying children and therefore was entitled to the earned income tax credit.

Section 32(d) provides that a married taxpayer who does not file a joint return is not entitled to an earned income tax credit. There is no mention of section 32(d) in the court’s opinion; therefore, it appears that the tax court overlooked the prohibition disallowing the earned income tax credit to married taxpayers filing separately.

Accordingly, the IRS will not follow the court’s opinion in Tsehay in allowing an earned income tax credit to a married taxpayer filing separately.